Kozmo Calls It Quits

Three years after first sending its orange-clad bicycle couriers out into the streets, online delivery service Kozmo announced Wednesday that it is shutting down and laying off its 1100 employees.

The New York-based company, which has laid off more than 500 workers since June and closed its Houston and San Diego operations in January, plans to liquidate its inventory, pay its creditors, and offer its employees severance packages, the company said in a statement.

A small transition team will remain on the job to close the corporate headquarters and the distribution centers in the nine cities the company served: Atlanta, Boston, Chicago, Los Angeles, New York, San Francisco, Seattle, Portland, and Washington, D.C.

"Given more time and more hospitable market conditions, Kozmo would have succeeded in rounding the corner and would have continued to grow," Gerry Burdo, president and chief executive, says in a statement.

When it launched in 1998, Kozmo's goal was to make money by offering a convenience everyone has dreamed of at one time or another: having a video or late night Ben & Jerry's ice cream pint delivered to your front door.

While other companies planned more full-scale grocery delivery, such as Webvan and Peapod, Kozmo targeted small items, such as CDs and candy bars, and sent deliverers out on bikes and motorized scooters, as well as in vans, as part of its free one-hour online service.

Changing Plans

But aiming small proved to be a mistake when the company found it was paying as much, sometimes more, to buy, store, and deliver the goods as it was charging for the orders. After the market began to nosedive a year ago, the company began charging a $2 delivery fee for orders of less than $30 and put in place a $5 minimum order.

Meanwhile, the company also decided to pursue a wealthier clientele by offering specialty items such as gourmet dinner kits, fresh flowers, and household and electronic items like personal digital assistants and portable CD players. And, in a sign of the dot-com backlash times, it dropped the "dot com" from its name.

Despite the changes and continued funding, the service began unraveling. In February, Kozmo announced the layoff of 60 workers as part of a shift away from Web site orders to phone orders. The company was preparing a print catalog for distribution beginning this month, as well.

In March, Kozmo pulled its movie rental drop boxes from Starbucks coffee shops and canceled a five-year $150 million agreement with the Seattle-based chain store after paying $15 million for the first year.

An unidentified investor who had promised $6 million in funding also backed out last month, the company confirmed.

Lack of customer interest wasn't the problem. Kozmo's membership more than doubled in the past year from 150,000 to 400,000, the company says. With the expanded product line, the average order grew from $10 in July to $25, and gross margins rose from 12 percent to 48 percent in the same period. The company was profitable in three markets: Boston, New York, and San Francisco.

Kozmo rival Urbanfetch.com didn't last as long as Kozmo did. Urbanfetch, which launched in 1999, closed its offices late last year after running out of money.